A surprising number of business executives are leaving their supply chains vulnerable to financial fraud, according to a new study by Deloitte Financial Advisory Services.Polling more than 2,600 executives, the study found that fewer than a third of respondents were deploying the kind of data-analytics tools that can detect fraud or waste by vendors. Another 13% had the necessary tools but were still learning to use them, while 22% had no data analytics of any kind.

Many managers, lacking sufficient knowledge of information technology, do not understand “the power of analytics,” said Deloitte principal Mark Pearson. As a result, they are failing to submit their invoices and contracts to the necessary level of scrutiny.

In addition, Pearson said, many companies harbor an attitude of “it can’t happen here.” Yet “folks who do fraud investigations every day recognize that it exists in most organizations.”

Part of the problem lies with the nature of “big data” — the existence of so many inputs that companies are having a tough time sorting through the noise and deriving information of value. Pearson said companies are doing a better job of identifying high-level trends in invoice characteristics than they are scrutinizing individual line items. But the latter is where most of the fraud resides.

Financial fraud among vendors and their subcontractors can take many forms. The worst, in terms of potential dollar impact, involves collusion between a company employee, usually in a procurement role, and an outside party. The buyer might be getting kickbacks or other financial incentives in exchange for using the vendor’s services. Another possibility is an employee creating a false vendor and submitting invoices on its behalf.

Perhaps most difficult to detect is misconduct by the vendor, often in the form of falsified labor and inflated bills. Then there’s the familiar pumping up of expense accounts and other kinds of allocated charges.

At the very least, one might assume that companies are carefully monitoring the expenses of their own employees. Often that isn’t even the case, said Deloitte partner Larry Kivett. “In our experience, labor-related charges, per diems and hotel, travel and expense charges tend to be pretty problematic.”

The typical invoice can be opaque, boiling down all labor costs into a single number. “It doesn’t contain the information a forensic accountant would want to see,” said Pearson. “Cost-plus” contracts are especially vulnerable to the imposition of illegitimate charges.

Fraud becomes even more of a possibility where multiple tiers of suppliers are involved. “Everybody knows who they contract directly with,” said Pearson. “But is that tier-one vendor actually creating the process itself? Or is it leveraging a supply chain that might contain entities that don’t have the client’s interest at heart?”

Kivett said there’s frequently a disconnect between the care that a company takes in sorting through bids and contracting with the chosen vendor, and the negligence it shows in following up to make sure that the contract terms are being met.

“On the back end, when you get to billing, you could have very summarized data that’s difficult to tie back to a contract,” he said. Unfortunately, those two tasks are often performed by different departments in “siloed” organizations.

Even up front, companies could be doing a better job of policing their supply-chain vendors. Kivett recommended more intensive background checks than most managers are currently conducting. “The best way to prevent fraud,” he said, “is to eliminate your bad apples before they’ve had access to your organization.”

It’s a piece of advice that many companies are failing to take. In the Deloitte survey, 12%of respondents said they monitor third parties for fraud, waste and abuse on a quarterly basis, while 13% said they do it annually.

Pearson said procurement managers need to exercise their right to audit vendors’ bills and activities. At the very least, companies need to have internal auditors in place, “to help them get smart about what it is they’re spending money on.”

As for the vendor, it’s less likely to engage in financial misconduct with a buyer that demonstrates diligence on a constant basis, Pearson said.

Analytics can go a long way toward smoking out the miscreants. Kivett says available tools for parsing the numbers are more sophisticated than ever. “There’s a proliferation of data that didn’t exist five to 10 years ago.” What’s more, “as fraud investigators, we’ve gotten smarter about fraud schemes.”

That assumes, of course, that companies are willing to make use of the available tools and expertise that can help to wipe out fraud in supply-chain relationships. But there’s some evidence that they’re waking up.

Deloitte sees financial fraud as a “hot area,” Pearson said. ”It’s a regular topic of conversation that we’re having now with clients. There’s reason for optimism — a heightened awareness.”

Guest Speaker Mr. Hemant Amin, Founder, Chairman and CEO of Asiamin Capital, a single family office, and Founder and Chairman of the BRKets investor groupMarch 17th, 2015

Hemant, a big thank you for educating and inspiring the next generation of leaders. You are a rare positive role model in the Asian capital markets and you showed the students that it is possible to create value because one has the right values and mindset like Buffett and Munger! :)